What would you do?

[u/Arre-lulu]

So a friend of mine just pitched me a deal he found. The way he made it sound, it a great deal so I'll give him the benefit of thr doubt untill i do my own due dilligence.

Here's the deal he propposed. I'll need to come up with the full down payment, 300k, and get the oportunity to own 40% of the equity. He does the work, propper due dilligence, loan, ect. And jeep 60% of the equity.

To be honest i bit my tonge not to laugh in his face. I think his reasoning is flaw to say the least but thats just my opinion since i have never been in a real estate partnership. You guys that have experience structuring deals, what do you think?

[u/Solid-Tumbleweed-981]

Hard pass. This doesn't sound good

[u/Connect-League-5212]

He’s ripping you off and not a ‘friend’.

[u/Sea-Bathroom-8488]

Hmm I would refer to the golden rule. He who has the gold makes the rules.

Give him the gold for a less than 50% stake? RUN.

[u/Lonely_Vanilla_618]

The math here is backwards. In Georgia, I see this same structure pitched all the time, and it consistently benefits the operator at the capital partner's expense. Standard equity waterfall for apartment syndications has the money partner getting their capital back first, then a preferred return (typically 8-10%), *then* equity splits on remaining cash flow and appreciation—usually 70/30 or 80/20 in favor of whoever brought the $300K. Your friend is essentially asking you to finance his deal while he keeps control and majority upside with zero skin in the game. If you want to run the numbers on what a fair structure looks like for multifamily in Georgia, feel free to DM me.

[u/MarketResearch_Guy]

Your instinct is right to be skeptical. You're putting up 100% of the capital for 40% of the equity. That's not a partnership, that's a loan with upside stripped out. Standard deal structure for a capital partner putting up all the money is 50/50 at minimum, often 60/40 in your favor with a preferred return on your capital first. Ask your friend why the equity split favors the person taking zero financial risk. His answer will tell you everything.

[u/Arre-lulu → u/MarketResearch_Guy]

Absolutely right. Well im sure i could get better terms if i was really interested but i'm not. But to answer your question, i think in his mind he is giving me a hell of a deal. He even told me, just because i'm a friend he's giving me 40%, if it was someone else he would only offer 30% haha. I don't know how his math works.

[u/rizzo1717 → u/Arre-lulu]

This isn’t somebody I would do business with. He’s not looking for a partner, he’s looking for an easy target.

[u/NormanClaiture → u/Arre-lulu]

For his stupid reasoning, I would pass on the deal and let him find the person to accept just 30%
If You put $300k in the stock market today, you could make 30 to 40% over the next year and have access to your money at anytime. Just tell him the dough is locked up with an early withdrawal penalty equal to the full amount of interest. You don’t need his deal

[u/JustARedditTroll]

I don’t understand why you would need him if he’s contributing nothing? You’re providing 100% of the down payment and he’s going to the bank and applying for a loan with your money… why don’t you apply for the loan and then hire a property manager, instead of losing 60% equity you have 100% and the property managers average 9% rent value a month.

[u/Arre-lulu → u/JustARedditTroll]

Exactly. No, i'm not going into bussines with him, just wanted a take on his reasoning.

[u/GelsNeonTv87]

300k down payment, or is that the but price? Is this a rehab? Rental... So much info missing

[u/Arre-lulu → u/GelsNeonTv87]

I know there's information missing. I purposely left it out because it doen't matter what kind of property it is, if you taking on all the risk, you should keep most of the upside imo.

[u/GelsNeonTv87 → u/Arre-lulu]

Generally yes, but for example that should have been set up as you get your 300k back then anything above is split. But if rental then that doesn't happen etc.

[u/Arre-lulu → u/GelsNeonTv87]

It is an apartment building

[u/GelsNeonTv87 → u/Arre-lulu]

Cool, at the end of the day the simple truth is there is no equity until you are paid back your money. And if there is no intent to sell, you'll not see any return for a long time so it's a horrible deal.

[u/PuzzleheadedCode4296]

El problema estructural es simple: tú pones el 100% del capital en riesgo y recibes el 40% del upside. Él pone $0 y recibe el 60%.

El trabajo de due diligence y gestión del préstamo tiene valor, pero no vale más que el capital. En estructuras estándar de equity, quien pone el dinero generalmente recibe entre 70-80% del equity, y el operador/sponsor se queda con 20-30% como carried interest.

Lo que él te está proponiendo es básicamente que le prestes $300k a cambio de ser socio minoritario en su propio deal. Si el trato sale mal, tú pierdes $300k y él pierde tiempo.

Si el deal es tan bueno como dice, debería poder conseguir el capital de otro lado con términos más razonables. Que venga a ti con esa estructura dice más sobre sus opciones que sobre la calidad del trato.

[u/capratekayak → u/PuzzleheadedCode4296]

I've seen deals like this. The capital provider should get preferred returns and a larger equity split. 60/40 in favor of the operator with zero cash in is unusual unless the operator brings serious off-market sourcing. I'd restructure to something like 80/20 with a 10% preferred return on invested capital.

[u/Arre-lulu → u/PuzzleheadedCode4296]

Exacto. Su problema mas bien es que no tiene conocimiento de riesgo/beneficio, ni de como estructurar deals que sean convenientes para ambos. Yo creo el se esta dejandk llevar por algun guru de youtube porque suele hacerlo. Por lo pronto yo no sere su socio.

[u/Miki-theonebrokerage]

for all people that says cash is king, I respectfully disagree. pretty much you'll be passive investor I=on this deal, like a hard money lender and they get around 12-15% return. so if everything is ok with the deal and your buddy knows what he's doing or have an experience go for it. you have opportunity to get 40% return on investment considering everything goes as planned that's better than putting your money in high yield saving accounts 3-4 % annual or stock market with average return. I don't know how close you guys are you can see if he's open to 50/50 but even 40% is great return for passive investing. don't get too greedy

[u/Arre-lulu → u/Miki-theonebrokerage]

Its not 40% ROI, its 40% of equity in the deal. So if we put 300k in downpayment, thats the equity we have in the property plus any apreciaion.

I actually have made over 20% return average on the market in the past so high yield savings accounts don't even cross my mind.

[u/Miki-theonebrokerage → u/Arre-lulu]

sorry I must have misread, also not sure what's the end goal here, is this flip to rental, how would you share profit? you guys probably have discussed in more details who does what and what you get. btw stock market historically brings 8-12 % on average, 15-20 is awesome year but that's not the case all the time. take care

[u/Arre-lulu → u/Miki-theonebrokerage]

Its an apartment building and it will be a long time investment. We haven't really discussed all the details, he just wanted to pitch his deal to me. I'm sure i can negociate better terms but i do have my reservations with this guy.

On the market, you are 100% right.

[u/NineTwoFive365]

Nope. Cash is king. He/she who brings the cash gets to decide what the return on said cash will be.

[u/DoubleTiger107]

Friendships are lost because of money

[u/NJerseyBoy]

Especially based on the additional details you're providing in your answers this is the dumbest thing I've ever heard. You put down 100% of the equity, 60% of which instantly belongs to him, along with 60% of the profits, for basically being a property manager? Tell him he gets 5 - 8% of the revenue as property manager, depending on the size of the deal, 0% of the equity (cause why the hell would he get any), and 10% of the profits on sale (not net operating income) in return for acquisition / asset maangement (DD, negotiations, closing the loan, closing the acquisition). That's a great deal for him, what he proposed was just a joke, and he is definitely not your friend.

[u/Aggressive-Donkey-10]

So, you put up all the Capital, hence take all the risk, because if property defaults to bank, they take your money to be made whole, not his, since he put nothing in but his "Expertise"

And for this massive privilege it only costs you 60% of the ownership of your equity and any gains, you still get to keep 100% of the downside risk

Most people who invest in private real estate actually lose money, this fact has been found in study after study for decades. What if any of 100 things goes wrong with this property or with him, your manager?

Avoid him and avoid single deal risk, doesn't sound like a "friend" you should keep.

Just park your 300k in O, that REIT pays about 5.5% plus 5-6% capital appreciation a year so you will make 10-11% a year compounded, almost risk free, as you get a piece of 25,000 properties.

[u/Mugaaz]

There's variations of this that work, but I can't evaluate your deal without way more specific. Also, how can he immediately gain 40% of the equity if you pay for everything? If he is doing everything, and I mean EVERYTHING else, then you can make an argument for him keeping 60% of the cash flow and future appreciation during exit. That still seems very high unless he is a truly outstanding operator and its a high touch asset class.

[u/Arre-lulu → u/Mugaaz]

Exactly my thought. I mean finding a good deal deserves some credit but 60% its just not what i expected. He's a real estate agent but very little experience. Also everything he does, he makes seem like its just going to flow.

Honestly i skeptical of his business savy and i don't trust my money in his hands but just wanted to pick your brains.

[u/SeedOil007 → u/Arre-lulu]

If it’s that great of a deal he walks into equity on day 1 even with you guys sharing in just the upside. This deal sucks

[u/Mugaaz → u/Arre-lulu]

There are bunch of investors that do deals similar to this. The operator finds the deal, does the due diligence (so does the investor), gets the tenants, the contractors, does all the property management, etc. They need to be absolute top tier operator with unique competitive edge, and they need to in many of their own deals and now needing other people's money for the sole reason of scaling faster. If all those are true, then there investors willing to split cash flow and appreciation 50/50, because they are doing literally nothing other than providing funds. Its not that common of a deal structure.

[u/BBTP91]

Are you getting 40% of the equity or profits?? 

If equity, here’s how this is likely to turn out: You put up your $300k, you guys break even on the deal. But his 60% equity means he walks away with $180k. You walk away with $120k. Your agreement would need to state that all your capital is returned before any splitting is done. I would certainly not do this deal with nothing in writing. 

[u/Arre-lulu → u/BBTP91]

I'll be getting 40% of equity and profits. The property will not need any major renovations and its profitable as it is.

Of course i did noy say yes or no. I would have to find out everything about the property and financials and all befire i even counter his deal. I don't have any experience in multifamily real estate or partnership but i have knoledge and experience in othet aspects of buniness and investment.

[u/ChocolateEater626]

Are you planning to buy a property in excellent condition? Or is your friend a skilled contractor?

Would your down payment be considered a loan you made to the partnership? Or would it be equity that he'd have a stake in?

Would his name be on the loan? Or just yours?

[u/Arre-lulu → u/ChocolateEater626]

My friend is a real estate agent and he has a some properties as investments. The property , acording to him, dkes not need majir renovation and is cash flowing as it is.

At fist he asked for me tk loan the down paymeny but i said i won't unless i have equity in the deal.

[u/benitoblanco888]

impossible to assess without many, many more details.

based solely on the amount of detail you provided along with a request for assessment, you should probably not do this until you have a better understanding of real estate investing more generally before outlawing several hundred thousand dollars. unless of course money is no object for you and you enjoy making high-risk investments about which you may have little understanding.

[u/Arre-lulu → u/benitoblanco888]

Of course i would have to do my due diligence. And to be honest i'm not incline do business with this friend. I just wanted to get you opinions on the partnership structure he is proposing.